With many in Congress eager to take a hatchet to the federal budget it is inevitable that agriculture programs will be cut. But the scope of cuts proposed by the White House early this week – including the end of $5-billion-per-year direct payments and a big drop in crop insurance subsidies – has farmer advocates and commodity groups repeating a complaint heard often in recent years: Agriculture is bearing a disproportionate share of the budget-fixing burden.

Even if agriculture programs emerge more intact than the White House wants, more uncertainty exists for the near future. The next farm bill must be written and agriculture’s major players are jostling over what policies to back.

In mid-September, the National Farmers Union (NFU) showcased a study done by the University of Tennessee Agricultural Policy Analysis Center that looks at how farmer owned reserves (FORs) would work for farmers and taxpayers in the current climate.

The study “found that, if we had adopted this approach over the last 13 years (1998 through 2010), the value of U.S. exports would have been nearly $5 billion more than it actually was,” said Roger Johnson, NFU President. “Corn prices would have been $0.26 higher than they actually were, wheat prices would have been $0.48 higher, and soybeans would have averaged $1.09 more over the period studied. The farmer-owned reserve acts to moderate highs and lows of grain prices, and during the period studied, farmers would have gained more income from market receipts and relied less on government payments, which would have been reduced by more than half.”

On Tuesday, Farm Press spoke with Harwood Schaffer, Research Assistant Professor at the UT Agricultural Policy Analysis Center[6]. Schaffer, one of the study’s authors, explained why FORs should be considered by Congress, how cotton would fit into the system and how it would stabilize food and animal feed costs. Among his comments:

On Obama’s budget proposals and how they would affect agriculture…

“I’ve been following the proposals in rough detail and am aware of what’s involved. Everyone seems to be figuring out a response.

“Certainly, Obama’s approach will come through the USDA. (Agriculture Secretary) Tom Vilsack was at the (recent) NFU meeting (where the UT study was released). He talked to the NFU but didn’t hear the presentation on the study. But I’m sure he has been apprised of it.

“The NFU, with its legislative fly-in, had visits with a large number of congressional members. They found at least some openness from a number of them.

“Part of that openness comes from the fact that in facing a climate where less money may be available, the study shows over the range of conditions that can happen – and actually did between 1998 and 2010 with relative historic lows and absolute historic highs – the policies outlined would have performed very well and would have saved a significant amount of money. That alone has created some willingness (amongst legislators) to look at this policy that many wrote off since 1996.”

NFU approach

On how the NFU approached the UT economists about doing the study…

“We’ve been talking about doing it for at least a year. We got more specific early this year when funding was discussed and the kind of issues that would be put under study.

“We had to do some work on the modeling side. Over the years, the modeling system has been used for number of things. The policy tools that the NFU wanted to put under study hadn’t been used in for many years. So, we had to do some work to ensure everything was (in order).

“Darryl (Ray, head of the UT Agricultural Policy Analysis Center) and I speak to various NFU groups every year. For instance, last January, I met with farmers in Texas to look at policy options including the elimination of direct payments, basically the elimination of LDPs, and the issue of where to set the loan rate so it provides a stable situation for farmers but isn’t capitalized into land and Monsanto profits.”

Why Monsanto is a concern in such a scenario…

“Monsanto has been clear that they take some large percentage of the gain their technology provides and leaves a smaller amount of gain for the farmer. It their technology increases the farmer’s yield by five bushels per acre, they figure out what the value of that is. They then capture what they believe is their rightful share of that gain.

“Obviously, the greater the commodity price, the more valuable that five bushels per acre will be and the greater Monsanto’s charge. That can end up not helping the farmer but means more money transferred to a supplier.

“What we want to do is stabilize farm income without increasing land or supplier costs. That involves a delicate issue of determining, in this policy, what the loan rate should be.”

FORs

On the study’s advocacy of farmer owned reserves (FORs)…

“There is a loan rate set and the farmer has the option, at any time, to look at the price offered in his local community and determine what is in his best interest. Traditionally, people begin using the loan rate when the market price is within a certain margin of the rate. It doesn’t have to get down to, or below, the loan rate for farmers to use it.

“By putting corn, wheat or soybeans under loan, the farmer will find it is under loan for a longer period of time. Historically, it’s a three year period. But in our model we didn’t set a specific period for the loan.

“However, farmers could put it in and use on-farm grain storage. The local (USDA) office would have to come out and certify they’d put the right amount of grain under seal. Then, it could only come out when the price exceeds the release price.

“That means the farmer holds it for the long-term, for those periods when there’s a shortage of supply and we experience the sort of spikes that peaked in 2007, 2008 and again in 2010. During those years, farmers would be allowed to release grain.

“The mechanisms for getting farmers to do that were not part of this study. We didn’t go into policy-making. Traditionally, farmers were incentivized by saying ‘at the release price, the government no longer will provide storage payments.’ The release price was set at 160 percent of the loan rate.

“Also – again, it wasn’t a part of our study – historically, when the price reached 175 percent, farmers were forced to pay the loan back. That meant they had to sell into the market. Of course, they saw some gain.”

Would there have been any value in lengthening the period for your study?

“We tried to pick a time period that was long enough to allow us to see how well the policy functioned in extremely low and extremely high prices. That was the criteria for picking that period.

“There was no reserve policy in effect during those years. That allowed us to compare the impact of a reserve policy – which deals with the causes of price/income problems on the farm – with the ‘throw money at it’ approach that was instituted in the 1996 farm bill and in subsequent legislation.”

On key study findings…

Throughout the study period, government payments for crops totaled $152.2 billion. If farmer-owned reserves had been in place during those years, government payments would have been $56.4 billion, or less than 40 percent of what the U.S. government actually spent on crop programs in those years.

“You’d have all the savings from direct payments since those wouldn’t be made. You have all the savings of the massive emergency payments in 1998 through 2001.

“You’d also have the savings in LDPs, which were paid on every bushel of grain produced. When we segregate some of the stock from the market in reserves, we’re only paying storage costs on a portion of the production, not every bushel. That means lower costs.

“When we segregate some grain from the market, the market price then rises. It will rise closer to the full cost of production. The users must pay the full cost of production instead of buying grain at costs far below the cost of production but with significant government subsidies.

“So, it would substitute market revenue for government revenue. It provides a mechanism by which excess supplies can be segregated from the market, allowing the market price to rise and providing a signal to the market that comes close to matching cost of production. That would mean major savings during such years.”

“If you look at government payments to farmers, there are two large peaks. In the first peak, prices were extremely low.

“For the second peak, prices weren’t extremely low but there were times during the year when the local county posted price went below the loan rate. That meant farmers received significant LDPs. Then, when the price rose above the loan rate later in the season, the farmers captured nice profits in addition to the LDPs.

“In later years, the high prices are due to the difference in direct payments. The blue line in the later years reflects direct payments.”

Farmer-owned reserves would have provided nearly the same amount of net farm income.

Does that hold across all financial levels? Small farms versus large?

“We allocated acreage at the county level, not the farm level. At the county level, given the cost of production for various crops, what mix of crops would provide the greatest income.

“At the same time, we recognize that there are certain limits on a farmer’s ability to move crops. For example, there is some rationale for a corn/soybean rotation. In addition to price, it takes some work to move some crops.

“Because of the way it operates, (the study’s plan) should provide benefits across various farm sizes.”

Costs and savings

Government costs would have been lower in large part because the loan rate would have been paid on only the portion of the crop that was put into farmer-owned reserves and not on every bushel that was produced.

Over the complete study period, the value of exports would have been $4.9 billion higher with farmer-owned reserves in place than under historical conditions for that period.

“Basically, in the report, with corn, wheat and soybeans, higher prices show that export quantity went down by a small percentage. Meanwhile, the value went up by a large percentage. That’s because price went up significantly.

“When you talk about value of exports, price is the issue for most of the crops. While people may say ‘loan rates hurt our exports,’ they actually may reduce the quantity a bit. But the higher prices increase the total revenue from exports.

“We must decide if we want to ship more at a much cheaper price or a little less at a much higher price.”

Because the U.S. would have held some buffer stocks under farmer-owned reserve policies, importers of U.S. corn, wheat and soybeans would have been assured of a stable supply of storable commodities, reducing the need for countries to protect local supplies of grains.

“During the study period there was no residual supplier in the world. In 2007 into 2008, governments began to shut off exports of their crops with the goal of protecting their populations from going hungry. They didn’t want to sell at a given price only to see the price rise and then be forced to import at a higher price.

“By having stocks in key crops – corn, wheat and soybeans -- in the United States, the other markets settle down. You wouldn’t have governments taking such actions because they know they can get grain from the United States at something close to the release price.

“There would be an upper bound on their risk. If there are no supplies, at all, and they’re scratching up whatever they can find, there’s really no upper bound.

“Politicians don’t get reelected when their constituents starve. That’s how revolutions begin.”

Livestock feed

Farmers would have benefited from price signals that more accurately reflect the supply/demand situation at a given time, than when futures prices reflect herd-following speculative behavior on the part of some market participants.

Livestock producers and industrial users such as biofuels producers are vulnerable to rapidly increasing prices. Farmer-owned reserve policies would have provided livestock producers and industrial users with security in the availability of feed supplies and the range of prices they can expect.

“With FORs, livestock owners wouldn’t have seen the collapse in feed prices we saw between 1996 and 1998. But when they bought their cattle they had already figured those prices into their financial calculations, so they could cover those feed costs. When they encountered low feed prices they made more money and expanded their production.

“In the mid-2000s, cattlemen expected corn prices in the low $2 range, which was profitable. Suddenly, the price began rising up to $7 in the spot market for corn. That meant feed costs shot up and cattle and poultry operations were in trouble.

“With FORs, there’s a supply so that if something like ethanol enters the picture there’s something to moderate the situation. There doesn’t have to be a ramp-up of corn production in just a year. That ramp up can happen in a longer time period and the reserves can fill the gap. There would just be a more stable supply.”

For the entire 13-year period, the value of production under the baseline policies was $413 billion while with farmer-owned reserves it would have been $446 billion – a difference of $2.6 billion a year.

Over the entire study period, corn prices would have averaged $0.26 higher, wheat prices would have been $0.48 higher, and soybean prices would have averaged $1.09 per bushel more under farmer-owned reserves than they actually were.

“Because the prices were extremely low in the early years, there was significant price gain for corn, wheat and soybeans. In the study’s early years, we had extremely low prices that were back-filled with LDPs and emergency payments.

“More recently, the top was taken off. That meant from 1997 on, farmers received slightly lower prices than they had historically. However, the prices were still above the cost of production.

“In some sense, in exchange for protecting risk on the low side, farmers give up some higher prices. It would moderate both ends and by doing so, cattle feeders do better. Those who are in both row-crops and livestock end up taking it out of one pocket and putting it in the other.”

Cotton and insurance

Any crops you’ve looked at that needs additional tweaking in the FOR system? Does cotton hold up like grains would?

“Historically, cotton was under these types of programs. In our model, we didn’t change the policies. We kept LDPs in for cotton and rice, although not direct payments. That’s because we couldn’t make the budgets work without that.

“On the other hand, those account for a relatively small portion of the total pie. So, yes, there is the need for tweaks since cotton is unique since it isn’t eaten. If its price changes, it certainly affects the profit of a farm but nobody starves.

“As for rice, the United States isn’t a big rice-eating nation. While we’re a small producer in the world, our rice exports are relatively large. In China, by contrast, they eat almost all the rice they produce and export almost none.”

Anything else?

“We believe the FOR system would be of great benefit to farmers. It would certainly reduce the cost of the revenue insurance they have. That’s because such insures against two kinds of risk: risk of price and risk of production.

“This would reduce the price risk significantly. Therefore, revenue insurance would have to mostly handle the production risk premium.

“So, it should have a positive impact on revenue insurance and crop insurance costs.”